Texas Instruments stock (NASDAQ: TXN) is up around 3% since the beginning of this year, and at the current price of around $130 per share, we believe TI stock has a significant downside.
Why is that? Our belief stems from the fact that TI stock remains about 34% higher than the low seen in early 2018. Our dashboard What Factors Drove 33% Change In Texas Instruments Incorporated Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.
Texas Instruments is a semiconductor manufacturer, whose products are used in a wide variety of electrical and industrial applications. TI stock’s rise over the past year followed on from a 36% growth seen in net income, which came despite a 4% drop in revenues. Revenues dropped in 2019 due to the semiconductor supply glut, which led to a drop in demand. Net Income rose due to a drop in the effective rate (39% in 2017 to 16.5% in 2018 to 12.4% in 2019). This, combined with a 5% drop in outstanding share count led to a 45% growth in earnings on a per share basis.
Finally, TI’s P/E ratio dropped from 26.5x at the end of 2017 to 24x at the end of 2019. While TI’s P/E has since risen marginally to 24.5x, given the volatility of the current situation, there is significant possible downside for TI’s multiple, especially when compared with previous years: 20.5x at the end of 2016, and 16x as recently as 2018.
So what’s the likely trigger and timing to this downside?
The global spread of Coronavirus has meant there is much lower demand for computing and hardware devices across all markets, which means lower semiconductor demand, and hence lower demand for TI’s products. In addition, there have likely been supply disruptions in China and elsewhere from the global Coronavirus crisis. We believe TI’s Q2 results in late-July will confirm the hit to its revenue. It is also likely to accompany a lower Q3 as-well-as 2020 guidance.
Regardless, if there isn’t clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/E decline from the current level of 24.5x to around 20.5x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $105.